Understanding Oil

Oil came to our attention in a big way in the same era when Henry Ford was on a path leading to his version of the internal combustion engine. Some degree of good fortune and some excellence in technology, the combination initiated one hundred and fifty years when the binge in the transportation started. At a glance we can see how fortunate this event was for the oil business. There is ample supply and seemingly no limit to demand defined by cars, trucks, trains ships, heating, electricity and plastics.

Demand for oil has always been influenced by governments. Conversion from coal to oil as an energy source has been aided by injecting public funds into the mix. Prior to world war two the British were converting their naval fleet from coal to oil. Winston Churchill led the charge by negotiating a special deal with a Middle Eastern country for supplying their oil to the British. We only need to look at World War Two when both the Germans and the Japanese fashioned offenses in order to secure supplies of crude oil.

There has been and continues to be publically funded supply of oil. Construction of a high capacity highway system is one example. Lessor developed countries subsidize the cost of gasoline.

Demand growth is here to stay as long as population growth, industrial expansion and agricultural usage continue to be in place.

What about supply? The supply side is very complicated including as a weapon of war, as a tool, to influence political motivations, an organization of suppliers dedicated to controlling supply, as a way of chastising countries for internal acts of violence, as a response to negative information about environmental interference, as sponsors of certain political motivation, and not participating in the evolution of a more efficient energy system.

A particularly interesting characteristic of oil supply for the transportation industries is the system of delivery is largely unchanged. We find it, transport it, refine it, transport it again, deliver, it at which time it is used to generate mechanical energy using an internal combustion engine.

Without question the components have gone through major changes; the system has not and the results are improved.

An interesting comparison among other transitions.

In the case of communications, photography, lighting, weapons, engines, and pharmaceuticals changes have been fundamental. The underlying technology bears no similarity, the system may or may not change, but the outcomes are far better.

Oil for transportation has followed the same journey, from start to finish. The individual components have gone through significant upgrades all the way from drilling to the engines of choice. So the system has not changed but the components have. Now for the first time the system is changing because of the trip to electrification. Components are changing as well all of which require new technologies and significant capital.

The elephant in the room is global warming. The cause remains debatable, the outcomes do not.

Greenhouse gasses are the apparent culprit rising as a result of industrialization. Fossil fuel combustion is a major contributor.

So now we have the proponents of combusting fossil fuels facing their adversaries who are against this way of producing energy.

By any means we are not dealing with a trivial matter here. Nations are threatened, lives are lost, economies are facing decline, acts of implementing new for old or old from new are happening or at least under threat, businesses are flourishing and political responses are emerging.

While on the face of it oil is talked about as a commodity it is very far from the supply and demand that are dependent on nature’s whims.

From the beginning oil supply has been strongly influenced by politics in the broadest sense all the way from the OPEC inspired cartel to the current uproar surrounding the conflict in IRAN.

The permutations and combinations of issues influencing the supply and demand of oil are increasing in complexity. The current departure from OPEC signals further disruption.